SummaryUS GDP growth figures for the 4th quarter of 2010 of 3.2% came in below the average analyst forecast for the quarter of 3.5%. Cyclically the US economy is expanding but its growth rate is significantly slower than in previous post-World War II business cycles. Despite the cyclical upturn the long term slowing of the US economy, analysed in previous articles, therefore continues. The underlying reason for this deceleration remains the decline in US fixed investment.
Trends in this business cycleTo place the latest US economic data in comparative context, the performance of US GDP during successive business cycles since 1973 is shown in Figure 1. The label for each cycle is the year of the peak level reached by GDP in the previous cycle, with the data lines then showing the consequent recession and continuing to the high point of GDP in the expansion. For comparison trends lines for 2.6% and 1.7% growth are shown – these being, respectively, the current 20 year and 10 year moving averages for US GDP growth.
It may be seen that recovery in this US business cycle is slower than in previous cycles.
The 4th quarter of 2010 was three years after the peak of the previous business cycle in the 4th quarter of 2007. US GDP in the 4th quarter of 2010 was 0.1% above that previous peak level. In comparison:
- three years after the beginning of the double dip recession commencing in 1980 US GDP was 0.6% above its previous peak level;
- three years after the beginning of the recession starting in 1973 US GDP was 4.8% above its previous peak;
- three years after the beginning of the recession beginning in 1990 US GDP was 5.3% above its previous peak;
- three years after the beginning of the recession commencing in 2000 US GDP was 6.2% above its previous peak.
The results of the latest data on longer term US growth are shown in Figures 2 and 3 – showing respectively 20 year and 10 year moving averages for US growth rates. The latest 20 year moving average for US growth, to the 4th quarter of 2010, is 2.6% and the latest 10 year figure is 1.7%.The deceleration of long term US growth is evident. The 20 year moving average of annual US GDP growth fell from a peak of 4.3%, in the 2nd quarter of 1969, to 2.6% in the 4th quarter of 2010. The 10 year moving average of US annual GDP growth has fallen from a peak of 5.0%, in the 2nd quarter of 1968, to 1.7% in the 3rd quarter of 2010.
The slow rate of US economic recovery
To show the consequences for US growth if recovery were to continue at the present rate, Figure 4 shows 3.2% US GDP growth projected to the end of 2011 - this growth rate is both that for the latest quarter and the average projection, in economists polled by the Wall Street Journal, for US growth in 2011.To take a comparison for the rate of recovery during US business cycles, the 4th quarter of 2011 will be exactly 4 years after the peak of the previous business cycle. Given 3.2% annualised growth until the end of 2011, US GDP in the 4th quarter of 2011 would be 3.4% above its previous peak. For comparison, after 4 years of the 1980 business cycle US GDP was 9.1% above its previous peak, in the 2000 business cycle the equivalent figure was 9.5%, after 4 years of the 1973 business cycle US GDP was 10.0% above its previous peak, and after 4 years of the 1990 business cycle US GDP was 10.5% above its previous peak.
Average growth over these cycles shows clearly the slow trend of the current recovery. Annual US GDP growth after 4 years of the 1980 business cycle averaged 2.3%, with the equivalent figures for the 2000 cycle being 2.4%, for the 1973 cycle 2.5%, and for the 1990 cycle 2.6%. However, given an average 3.2% growth until the end of 2011, annual average US GDP growth over 4 years of the present US business cycle would be only 0.9% – a slow recovery in comparison.
Decline in investment
The reason for both the depth of the US recession and relatively slow growth during recovery in the present business cycle is clear. As analysed in previous articles the present US recession is dominated by the fall in fixed investment. Figure 5 shows, in constant price 2005 dollars, the change in the components of US GDP since the peak of the previous business cycle. As may be seen, both US GDP and all components of GDP, excluding the marginal decline in inventories, are now above their previous levels - except for fixed investment.US GDP is $19bn above is previous peak level, while inventories are down a marginal $5bn. The increase in personal consumption is $89bn, the rise in government consumption is $131bn, and the increase in net exports is $168bn. However US private fixed investment is $386bn below its 4th quarter 2007 level.
As shown in Figure 6, the current decline in US fixed investment far exceeds that seen in previous post-World War II business cycles. In the 4th quarter of 2010 US private fixed investment was still 21.5% below its peak level - the latter being reached almost five years previously in the 1st quarter of 2006.Not only is the depth of fall of fixed investment in this business cycle far greater than in the previous ones, but it is unprecedented in a post-World War II business cycle that after five years US private fixed investment is still below its previous peak.
Decline in non-residential fixed investment
It is important to note that this decline in US fixed investment is not confined to the residential sector. As shown in Figure 7, approximately half the decline in fixed investment is due to decline in the residential sector and half to the non-residential sector - the fall, in constant price terms, in residential fixed investment is $197bn and the decline in non-residential fixed investment $193b.
Figure 8 similarly illustrates that the decline in non-residential fixed investment in this business cycle is more severe than in previous cycles.
US non-residential fixed investment peaked in the first quarter of 2008 and by the 4th quarter of 2010, i.e. 11 quarters after this peak, was 12.5% below its previous highest level. After the same number of quarters in the 2000 cycle non-residential fixed investment was 9.9% below its previous peak, in the 1973 cycle 6.1% below its previous peak, in the 1980 cycle 5.4% below, and in the 1990 cycle 4.7% below its previous peak.Therefore the fall in non-residential fixed investment in this business cycle was more severe than in previous post-war cycles.It is interesting to note that the slowest pace of recovery of non-residential fixed investment, prior to the present cycle, was in the 2000 cycle – i.e. recovery of non-residential fixed investment has been slower in the last two US business cycles than in previous ones. Such a slow rate of recovery of non-residential fixed investment would, of course, in large part explain the slowing long term rate of growth of the US economy.
The long term trend of US fixed investment
In order to show the structural consequence of this weakening trend of US investment, Figure 9 shows total US fixed investment, i.e. including both private and government fixed investment, as a percentage of GDP at current prices.As may be seen, until the mid-1980s, with relatively short term fluctuations, US fixed investment remained relatively stable as a percentage of GDP – essentially centred on a level of 20% of GDP. This was, however, from the mid-1980s followed by a decline, with the percentage of fixed investment in GDP falling to 17.0% of GDP by 1991, recovery and then a lesser fall to 18.4% of GDP in 2002, and a precipitate drop to 15.3% of GDP in 2009.
In short, from the mid-1980s onwards, the level of fixed investment in the US has experienced both greater fluctuations and greater declines as a proportion of GDP. The consequence of the aftermath of Reaganite economics has therefore been a fall in US fixed investment as well as slower US growth rates.
Figure 10 shows that this fall in US fixed investment affected not only the residential but also the non-residential sector. US non-residential fixed investment rose relatively steadily to a peak of 14.0% of GDP in 1981 but then began to decline overall and fluctuate more significantly – the low point being reached at 9.5% of GDP in 2009.
The fall in residential fixed investment after 2005, to a low of 2.5% of GDP in 2010, is evident in Figure 10.In short the last two and a half decades have seen a significant fall in US fixed investment in both residential and non-residential sectors.
ConclusionThe US economy has continued to turn upwards after the Great Recession. Such cyclical recovery may be expected to continue in the coming period - as it has so far been in place for only six quarters. But the pace of economic US growth is significantly slower than in previous post-war economic cycles. It is insufficient to reverse the long term slowdown in the average growth rate of the US economy. Only a reversal of the underlying decline in US fixed investment would be sufficient to halt this slowing of the US economy.
For a longer term, and more detailed, analysis of the long term deceleration of the US economy readers are referred to an earlier article.